Knock-Out Option
Definition of 'Knock-Out Option'An option with a built in mechanism to expire worthless, should a specified price level be exceeded. A knock-out option sets a cap to the level an option can reach, in favor of the holder. As knock-out options limit the profit potential for the option buyer, they can be purchased for a smaller premium than an equivalent option without a knock-out stipulation. |
|
Investopedia explains 'Knock-Out Option'For example, an option writer may write a call option on a $40 stock, with a strike price of $50 and a knock out level of $60. This option only allows the option holder to profit up to $60, at which point the option will expire worthless, thus limiting the loss potential for the option writer.Knock-out option are considered to be exotic options and are primarily used for commodities and currency options. |
Related Definitions
Articles Of Interest
-
Pin Down Stock Price With Real Options
How can you assign a value to what a company may do with its business in the future? We explain how it works. -
Cut Down Option Risk With Covered Calls
A good place to start with options is writing these contracts against shares you already own. -
Options Basics Tutorial
Discover the world of options, from primary concepts to how options work and why you might use them. -
Going Long On Calls
Learn how to buy calls and then sell or exercise them to earn a profit. -
How To Avoid Closing Options Below Intrinsic Value
Find out how to get a better price for your option and increase your trading profits. -
6 Asset Allocation Strategies That Work
Your portfolio's asset mix is a key factor in whether it's profitable. Find out how to get this delicate balance right. -
American Vs. European Options
These two options have many similar characteristics, but it's the differences that are important. -
Pay Attention To The Proxy Statement
Don't overlook this overview of a company's well-being. -
How Risk Free Is The Risk-Free Rate Of Return?
This rate is rarely questioned - unless the economy falls into disarray. -
An Introduction To Gamma-Delta Neutral Option Spreads
Find the middle ground between conservative and high-risk option strategies.
Free Annual Reports